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Forex slippage: How slippage happens and why you need a good broker

What to do with forex slippage; how it affects traders

Many students expressed concerns that slippages happened to them during trading when I was discussing about choice of brokerswhile training the class of Tflow® Forex Course Intake 36.

What is slippage?

Slippage definition: A slippage happens when a limit order or stop loss is triggered at a worse price than the originally set price. Forex slippage is very frustrating and one reason for traders to encounter heavy unexpected losses. If you encounter slippage regularly during trading, you may have chosen a bad broker.

The slippage went up to 40 over pips diff.

Circumstances when slippages happen

time of low volatility (not too much liquidity or trading volume in certain timezone or certain period of time; low volatility usually happens during Asia trading zone or before market opens/closes)

or simply, your broker decided to ‘slip’ you or play tricks to your price fill

or you have dealt with brokers with very few liquidity providers (most of time, this happens when you are trading with a market-maker)

Observing your broker’s ability to fill your trade at the right price

Extreme price movement (like when price spike happens) is the best test of your broker’s ability to fill your trade at the right price. This is also the best test to understand how your broker is handling slippages (or whether you have encountered slippages).

Let me illustrate with a trade that happened to me. This was a very good opportunity to test my forex broker’s ability to fill me at the indicated price or even better price. If you are interested in this broker, make sure you use this link to get you into A-book (and not into risk book or B-book) and also getting all the privileges that TerraSeeds students have. Link: http://bit.ly/liveacct

What happened to me on EURGBP Trade? Filling at good prices

I had a limit order to close my trade for EURGBP at various prices. This means that I have already existing trades that sold EURGBP and I wanted to close my trades at a lower price. So I put in a limit order lower than my trade price. In a limit order, once price quote reached the indicated limit price, this will translate into a market order. Your broker will then fill you at whichever price they are able to get. Therefore a limit order does not guarantee that your order will be filled at your indicated price. Thus slippages can happen here.

At that particular 1 minute bar, EURGBP had a price spike and all my orders were filled accordingly. My broker has more than 20 plus liquidity providers including 2 major banks that can fill my orders.

Limit order and actual fill price done by my broker

I have 3 positions that were filled in that 1 min bar.

3 limit orders were keyed in:

0.8562 filled at 0.8557 (better price)

0.8546 filled at 0.8543 (better price)

0.8540 filled at 0.85376 (better price)

Note that all these orders happened in a spike of EURGBP in just 1 minute. The ability to fill accurately each order and even a better price during such a spike says a lot about this broker’s liquidity.

Price chart of EURGBP 1 min bar and the actual price filled by broker

Why is it important to choose a good broker?

Brokers have a natural win rate, as the common saying suggests “95% of traders lose money”. If this is the case, they do not need to do anything to make money from 95% of traders.

However, whether you are losing or making money, it is important to have a forex broker who do not play tricks on you. Why? I always believe that when we lose money, the loss must not be inflicted by others. Let’s play it fair.

Many brokers provide wonderful services and platform, but most of them do not want to admit that they are market makers. There are even worst types, where they claim that they are Straight Through Processing framework (STP), but only a minority of their clients are applied STP. Even you get to a STP broker, how sure are you that you are not B-booked (or placed in Risk-book)?

Students’ Experiences

I like to share a student’s account with one market-maker. I have deleted all traces of student’s identity and also the market maker operating in Singapore involved in this email. The main purpose is to let you understand how a slippage can happen to you.

Student account of slippage with a market maker operating in Singapore

Again if you would like to explore a good broker, please leave a comment or use this link to get all privileges that I’ve arranged for TerraSeeds students. http://bit.ly/liveacct

Update September 08, 2014 – We have documented a positive forex slippage here. It is a situation when price slippage happens in trader’s favour.

3 thoughts on“Forex slippage: How slippage happens and why you need a good broker”

I was warning my friends about those so called “STP Brokers” in Malaysia that they are mostly Market Makers, but they choose to ignore my advice as they are making Affiliates Pips from their down line trading activities.

They also used IntraDay Scalping strategy taught by the STP Introductory Brokers to trade, so it’s not hard to imagine what happen to most people trades. My friends accounts also blow out recently, very irony ya.

For Malaysia, it is very tricky. The fear is NOT to trade with market-makers (at least, these brokers are still regulated) but to trade with BUCKET SHOPS. Such bucket shops are only after margin, meaning that the more deposits that their clients have, the happier they will be.

I once met with a bucket shop operator in Jakarta. I asked him: did his company hedge clients’ positions? He replied: why bother to hedge since 99% of traders will eventually lose money. The bucket shop just have to employ young traders to help rich clients trade their money. Eventually in just 2 weeks, I know of a client of them who lost few hundred thousands USD vanished into thin air. But this client has connections with the big boss and so can demand the few hundred thousands to be compensated back to him. Think about those who don’t have any connections…

For Malaysia, a legitimate mean to make more money (forex trading) was turned into Multi-level-marketing (MLM) program. Sometimes spread of EURUSD can be as high as 6-8 pips because that money was distributed among affiliates.

In order to get the down lines to trade, almost all would do scalping strategy (that’s how they can churn volume). The promise of QUICK MONEY using LITTLE TIME is too attractive already. Attractive to who? Well, to traders of course. But truth not told because scalping is the easiest way to lose money. So do beware of any educators asking you to scalp or even anyone who ask you to scalp.

In Singapore, there are also many ‘blacksheep’ brokers. Do choose wisely.

Thanks Binni for your explanation of the bucket shop was an eye opener to me. No worries for me, I had already gone through the path of a trader. I had been swing and position trading with the same broker since recommended by you three years ago. Now I am just focusing on compounding my account :)